Asedillo, Ramos & Associates

February 4, 1986 Asedillo, Ramos & Associates 6th Floor, Manila Bank Bldg., 6779 Ayala Avenue Makati Metro Manila Gentlemen: This relates to your letter dated September 10, 1985, requesting clarification on the application of our Rules Governing Redeemable and Treasury Shares (1982)" specifically Section V (5) thereof. From the facts stated in your letter it appears that Merchants Investment Corporation (MIC) at the time it suspended its operation in 1977 under its former name, Filcapital Development Corporation, owed TMBC Investment Corporation, the Manila Newtown Development Corporation and Manila Bankers Life Insurance Corporation, (The TMBCIC Groups) the sum of P25,100,784.63 in the form of unpaid placements and temporary overdrafts. Under the terms of a Compromise Agreement between MIC and TMBCIC Groups, the TMBCIC Groups agreed to convert a portion of the aforesaid obligations into non-interest bearing and non-participating preferred shares which MIC undertook to repurchase within the period 1984 to 1988, and with the agreement that should MIC fail to repurchase or cause to repurchase the said preferred shares the whole obligation shall automatically become immediately due and demandable without need of demand. llcd On June 27, 1985, MIC informed TMBCIC Groups that MIC could not redeem its preferred shares because it has been incurring losses and that if the redemption is to be effected, MIC would not have sufficient assets to cover its debts and liabilities. MIC cited Section V(5) of SEC Rules Governing Redeemable and Treasury Shares (1982). For reasons stated in your letter, you contend that Sec. V(5) of our "Rules Governing Redeemable and Treasury Shares (1982)" is not applicable to the present case. Hence, to resolve said issue, presented before this Commission is your request for a ruling on the proper interpretation of Section 8 of the Corporation Code, in line with Section V(5) of our "Rules Governing Redeemable and Treasury Shares (1982)". Section 8 of the Corporation Code provides thus: "Redeemable shares may be issued by the corporation when expressly so provided in the articles of incorporation. They may be purchased or taken up by the corporation upon the expiration of a fixed period, regardless of the existence of unrestricted retained earnings in the books of the corporation, and upon such other terms and conditions as may be stated in the articles of incorporation, which terms and conditions must also be stated in the certificate of stock representing said shares." Under Section 143 of the Corporation Code, the Commission has the power and authority to promulgate rules and regulations reasonably necessary to enable it to perform its duties thereunder particularly in the prevention of fraud and abuses on the part of the controlling stockholders, members, directors, trustees, or officers. In line with this, and to supply with the details of legislation as well as to interpret and construe certain provisions of the Corporation Code, the Commission promulgated the "Rules Governing Redeemable and Treasury shares (1982)", wherein under Section V(5) thereof, Section 8 of the Corporation Code was expounded, when it provided that: "Redeemable shares may be redeemed regardless of the existence of unrestricted retained earnings, provided that the corporation has after such redemption, sufficient assets in its books to cover debt and liabilities, inclusive of capital stock ." Considering the foregoing, the Commission in its meeting held on January 27, 1986 resolved to apply said Section V(5) of our Rules Governing Redeemable and Treasury shares (1982) in the situation confronting the Merchant Investment Corporation (MIC). Please be advised accordingly. Very truly yours, (SGD.) MANUEL G. ABELLO Chairman